Sayuri Shirai: Shifting toward a moderately inflationary economy in Japan - overview of firms' and households' inflation expectations

It is a great honor to have this opportunity to speak to you today about Japan's current monetary policy. With the aim of achieving its 2 percent price stability target, the Bank of Japan (hereafter the Bank) adopted quantitative and qualitative monetary easing (QQE) in April 2013. QQE was expanded further in October 2014. This was because of the potential risk that a decline in the consumer price index (CPI) inflation rate – driven by somewhat weak domestic demand following the consumption tax hike and a substantial decline in crude oil prices – may have exerted downward pressure on inflation expectations, thereby undermining the positive developments in wage negotiations and firms’ price-setting behavior. In my view, the QQE expansion was important to ensure a virtuous cycle from income to spending. Thereafter, crude oil prices dropped further and inflation has continued to decline, but domestic demand has continued its moderate recovery trend. Moreover, the Bank believes that inflation expectations appear to be rising on the whole from a somewhat long-term perspective. Nominal and real incomes are expected to rise, and thus the rate of increase in the CPI is expected to become positive once drops in crude oil prices stall and prices subsequently increase moderately.